Broker Bernstein believes Tesco’s future can be “great again” with Dave Lewis in charge, but how quickly this can happen is “uncertain”.

Eight ways Tesco could turn itself aroud, according to Bernstein

Bernstein’s Bruno Monteyne outlines eight areas of change he believes would turn Tesco back into a “formidable retailer and the envy of the industry”.

1) Segmentation: Amazing prices, amazing quality and service, but not necessarily in the same store

Bernstein argues that Tesco cannot continue with national pricing. Monteyne says: “National pricing was the right solution 15 years ago when there were lots of local monopolies to worry about; today UK consumers are worse off because of it and that is why you will be allowed to ditch it.”

Bernstein says Tesco’s current cost structure doesn’t allow it to compete on price, and only once it has lowered costs can it do the big price cuts of 5% to 10%. He says segmentation would probably lead to different brands and would “help set expectations with consumers about how radically different each proposition is, it would help with ditching national pricing” but adds “I can see there is substantial risk involved”.

2) Don’t close (too many) stores; re-utilise the space

Bernstein says Tesco should not close too many stores but rather re-utilise the space. Monteyne says Tesco are already starting to do this by subletting to other tenants, and adds the most promising thing Tesco has done is the Mansfield trial – reducing the trading size of the store and making a mini-dark-store for online food in the excess space.

‘By repurposing the space to execute online food you kill two birds with one store”

Bruno Monteyne, Bernstein

He says: “Go full speed ahead on the Mansfield project: big box retail will continue to lose volumes due to growth of convenience and online food; by repurposing the space to execute online food you kill two birds with one store, maintain the highest online food profitability in the world and improve your service levels.”

3) Close the side shows if they can’t break even in 12 months

Bernstein says any business unit that can’t break even within 12 months should be closed immediately. According to Monteyne, Tesco lost the battle with non-food, and is now in awe of businesses such as Amazon but he adds “that excessive awe seems to have turned into hubris”, pointing to Hudl, Blinkbox and Tesco Direct’s marketplace. He says the rationale for doing it is dubious (people who shop across channels spend more) and seems “entirely irrelevant” for the huge amounts of customers leaving the retailer.

He also says businesses such as Giraffe and Harris + Hoole should be offloaded if they “can’t stand on their own two feet”.

4) Rationalise Eastern Europe assets through asset swaps; list Korea and Thailand

Bernstein says Tesco lacks local integration in its international markets. Monteyne suggests Tesco should sit around the table with Rewe and Auchan with a map of Eastern Europe and carve it up. He says Tesco did it a few years ago with Carrefour, swapping Czech Republic assets for Taiwan assets.

In Asia, China is “massively overvalued” he says, and “should be part of the kitchen sinking”. India is “too small today and even harder to fix than China was, so just close it”.

He says the quality assets are Thailand and Korea but as local markets get more competitive, Tesco will “struggle more and more”. He adds: “Growth is slowing down and the next wave clearly seems to be convenience.”

He says Tesco should “go the Casino way: make separate businesses out of them, with local management teams, and list them locally”. He adds: “If that sounds too farfetched, then sell them.”

5) Clean up the accounts

Bernstein says there has been “stress” on the Tesco accounts since 2007 – nothing that “crosses the line, but lots that push the line”.

Monteyne thinks the way Tesco treats pension costs in underlying earnings doesn’t make sense, and also, the grocer needs to review what it capitalises and what it doesn’t.

He says PwC has served the company as auditor since 1983 and the last audit tender was carried out in that year. He adds: “Your food retail market is a bit more competitive than that.”

6) Culture and morale of the company

Bernstein believes Tesco’s culture and morale is one of its strongest assets but “there is some serious corrosion happening that needs dealing with quickly”.

Monteyne says: “Lots of proud people that used to work for the best UK retailer have seen their employer’s name dragged through the mud and their bonuses severely cut for the last three years. But they are a tough lot and above all they love being the underdog.”

He says they are also used to seeing their execs in the stores frequently adding it is “not a bad place to be for the first few weeks”.

Monteyne adds: “Tesco lost some amazing executives. Bringing a few of the really heavy hitters back to reinstate the culture that made Tesco great may not be a bad signal.”

7) Head office costs

Bernstein says the size of the current head office derives from a misguided attempt to do so many things for so many people. Scrapping some of the side shows will help, along with the teams that have grown too big.

Monteyne adds that Tesco used to have a model of six work levels, from shelf stacker to board member. But as it has grown, the management layers have grown. This should be simplified.

He adds: “I do not think this is the most critical bit of the turnaround plan, but it can be initiated quickly, sends a signal internally and externally and will free up some cash for the investments you will want to make.”

8) Cash focus: the future of Tesco as a stable cash dispenser

Bernstein asks: “Will this plan return Tesco to its heyday of 15% EPS growth? No. But it can come back to be a formidable UK food retailer and stable cash dispenser.”

Monteyne says: “With Tesco’s brand restored, it could stretch into neighbouring products again, adding another 1% of revenue.” He says its international listed operations can further increase earnings growth.

He says Tesco needs a single-minded focus on cash and ROIC being key management objectives. He says: “Don’t use sale and lease backs, write downs or pension deficits to artificially manage your current ROCE number. That would bring us back to the point on data honesty and cleaning up of accounts.”

Bernstein concludes that Tesco has failed to adapt to the changes in the UK competitive landscape and that while a lot of the bad news is already incorporated in the share price, it is “too early to call the bottom”.

Monteyne concludes: “When the new CEO unveils his strategy, together with a kitchen sinking of the accounts, and assuming the new strategy is a good one, then the stock could offer opportunity again.”